3B.2c - Special Economic Zones and Attitudes to FDI

Special economic zones, government subsidies and attitudes to FDI (China's Open Door Policy) have contributed to the spread of globalisation into new global regions. (P: role of governments in attracting FDI)

Attitudes to FDI
  • Attitudes to FDI have changed in developing and emerging countries.
  • During the period of decolonisation in the 1950s, 1960s and 1970s, many newly independent countries rejected international trade as exploitative. 
    • They preferred self-sufficiency through import substitution. 
  • However, four Asian countries (Singapore, Taiwan, South Korea, Hong Kong) chose export led growth.
  • They experienced much faster economic growth than countries following import substitution, and became known as 'Asian Tiger economies'.
  • By the 1980s, most countries had changed their attitudes towards FDI and globalisation. 
  • They no longer viewed FDI as exploitative (paying low prices for resources, low wages to workers, demanding low taxes and polluting the environment.)
  • Instead they viewed FDI as positive - creating new jobs, better paying than the existing alternative (e.g. subsistence farming) with reliable wages and better working conditions, which introduced new technology and were reliable tax contributors. 
  • As a result, FDI by developed country TNCs expanded to new areas, initially to the Asian Tigers, then to other Asian and South American countries, and since 2000 also African countries.  

Subsidies
  • Subsidies are payments by the government to a company to promote a particular activity. 
  • Governments may provide subsidies to attract FDI, e.g. a subsidy to cover relocation costs, payment per worker employed &c.
  • WTO usually prohibits subsidies to domestic firms as this acts as a trade barrier - the government payment allows a firm to accept a lower market price, undercutting the price of imports. 
  • WTO may accept a subsidy for FDI, e.g. in SEZs, as this promotes trade.

Special Economic Zones (SEZs)
  • Special economic zones are enclaves where investors receive special tax, tariff and regulatory incentives. 
  • About 50 million people in more than 100 countries work in such locations. 
  • SEZs are used by some countries to attract FDI, spreading globalisation to new regions. 
  • Successful SEZs need good infrastructure, close proximity to trade routes or emerging markets, minimum bureaucracy and rule of law (contract security, minimal corruption, freedom from crime and violence.)
    • Example: In the 1960s President Suharto of Indonesia created the Jakarta Export Zone with attractive legal and economic conditions designed in consultation with US and European TNCs. 
    • The World Bank funded infrastructure improvements for ports, power supplies and roads. Gap and Levis FDI followed. 

SEZs and similar models are attractive to FDI for a number of reasons:
  • They are tariff and quota free, allowing manufactured goods to be exported at no cost. 
  • Unions are usually banned, so workers cannot neither strike nor complain. 
  • Infrastructure such as port facilities, roads, power and water connections are provided by the government, providing a subsidy for investors and lowering their cost. 
  • All profits made can be sent to the company HQ overseas. 
  • Taxes are usually very low, and often there is a tax-free period of up to 10 years, after a business invests. 
  • Environmental regulations are usually limited. 

China's 1978 Open Door Policy
  • Under Chairman Mao Zedong, communist China was 'switched off' from the global economy. Most people lived in poverty in rural areas. 
  • In 1978, Deng Xiaoping introduced the 'Open Door Policy', slowly introducing economic liberalisation and opening up to FDI while maintaining a strict one party political system. 
  • SEZs were created on the coast, such as the Pearl River Delta Zone, the Shanghai Economic Zone, attracting a rapid inflow of FDI. 
  • In 1980 it created the Shenzhen Special Economic Zone. 
  • Exports soared from $2 billion in 1980 to $200 billion in 2000. 
  • China joined the WTO in 2001, guaranteeing other countries would lower tariffs on exports from China. 
  • By 2006, China was receiving $60 billion in FDI per year. 
  • China experienced rapid economic growth, reaching 10% p.a. in the 1990s. 400 million people were lifted from poverty. 
  • Legal restrictions were relaxed on FDI in some sector's of China's domestic economy, e.g. rail freight and chemicals.
  • China agreed to remove export restrictions on 'rare earth' minerals, following a WTO ruling.
  • The Chinese government's sovereign wealth fund and Chinese TNCs are now a major source of FDI in other countries. 
  • Information flows are controlled. Google and Facebook access is limited. The Chinese Youku is the social media provider. 
  • Cultural erosion is limited - a quota of 34 foreign films per annum in Chinese cinemas. 
  • FDI restrictions in some sectors. Coca-Cola's attempted acquisition of Huiyan Juice was blocked in 2008.
  • In many Chinese SEZs wages are now high by global standards and countries like Vietnam are more competitive. 

These have contributed to 'made in China', with FDI pouring in over the last 30 years. Western consumers benefit from low-cost goods, but there are question marks about pay and working conditions in SEZs. Apple was subject to negative publicity in 2010 when working conditions in its supplier factories (owned by Foxconn) making iPhones and iPads, came under scrutiny.